The Challenges of the Latin American Airline Industry
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The Challenges of the Latin American Airline Industry How Grupo TACA succeeded in a challenging economic environment. Gabriela Kaynor Brian Mottola March 8, 2003. Today’s Agenda. Purpose Privatization Movement Early years of aviation in Latin America TACA’s inception TACA’s alliances

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The Challenges of the Latin American Airline Industry How Grupo TACA succeeded in a challenging economic environment

Gabriela Kaynor

Brian Mottola

March 8, 2003


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Today’s Agenda

  • Purpose

  • Privatization Movement

  • Early years of aviation in Latin America

  • TACA’s inception

  • TACA’s alliances

  • TACA’s competition

  • History of other Latin American airlines

  • Conclusions


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Privatization Movement

  • Latin American economies are stagnant

  • State-owned companies in many industries

    • 12% of GDP in Latin America

  • Privatization encouraged to create efficiency

    • Govt’s severed burdens of state-ownership

  • Privatized industries create needed tax revenue


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The Birth of TACA

  • TACA – Transportes Aereos Centroamericanos

  • Est. 1931 by Lowell Yerex in Honduras

  • Entrepreneurial opportunity existed

  • Quickly grew into a strong regional airline

    • Linked all Central American capital cities

    • Linked Mexico and Caribbean


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Birth of TACA (Cont’d.)

  • TACA formed airlines in different countries

    • Named “TACA de (country’s name)”

    • Nicaragua, Belize, Costa Rica

    • Parent company was TACA de Honduras

  • Enabled local air routes to be established

  • Used small, aging aircraft to reduce its costs

  • Faced increased competition from int’l airlines

    • Pan American Airways, Trans World Airlines


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The Original TACA dissolves

  • TACA country members want own nat’l airline

  • By 1948, all TACA shares resold to govt’s

    • Beginning of the end of original TACA corporation

  • TACA El Salvador was only airline left under original TACA banner

  • Changed name to TACA International Airlines

    • Beginning of modern-day TACA


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TACA International Airlines

TACA Airbus A-319



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TACA International Airlines

  • Current CEO Federico Bloch started with the Company in 1979

  • His vision  setting up subsidiary airlines through partnerships in Latin America

  • Bloch has received multiple awards and accolades for his outstanding achievements within this very competitive industry.


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TACA Alliances

  • Bloch pursued the acquisition of several Central American National Airlines. Complete by 1991.

    • Guatemala (Aviateca), Honduras (SAHSA), Nicaragua (NICA) & Costa Rica (LACSA)

  • They also have feeders in Cuba and Peru

  • Alliance with American Airlines

  • Conglomerate with National & International airlines under one umbrella


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Competitive Advantages..

  • Cross border alliances

  • Quasi- Monopoly for domestic markets

  • Control of pricing for Central American fares

  • Multiple “hubs”

  • Increased number of destinations

  • Growth opportunity in South America


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Side Effects….

  • Pursuit of customer oriented business practices becomes secondary

  • Multiple connecting flights to reach destinations

  • Subject to economy swings in Latin American Countries

  • Proven profitability attracts competition


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Competitors

  • Other Latin American Airlines have tried to follow suit with this business model

  • Successful competitors include

    • Aerocontinente Peru

    • Lan Chile

    • VASP from Brazil

  • Unsuccessful stories

    • VIASA Venezuela


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LAN CHILE

  • Linea Aerea Nacional – founded in 1932 as a government owned carrier

  • In 1989 they sold 51% of their shares to SAS (Scandinavian Airline Services)

  • 1994 – 100% Privatized

  • 1995 – Acquired Lan Express

  • 1996 – 44% sales growth (3rd largest in the Industry


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  • Executive VP Enrique Cueto (Executive of the Year 2001)

  • Vision  Become one of Top 10 airlines

  • Strategies to survive after 2000 decline

    • Reduction in frequency of domestic flights

      • Increasing capacity utilization

    • Built strong alliances with international partners

    • Separate business structure

      • Cargo Operation – Lan Cargo

      • Passenger Operation – Lan Pax


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VIASA (Venezuela)

  • 1959- Shift from a government airline (AEROPOSTAL) to a private venture

    • AEROPOSTAL 51% capital

    • AVIANSA(owned by PAN AM Airlines) 49%

    • Formed alliance with KLM

  • Cargo Operation Subsidiary TRANSCARGA

  • 1975 – First reported loss

  • 1976 - Airline Nationalized again


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    Effects of Nationalization..

    • Government was covering up losses and inefficiencies

      • No operational or strategic improvements being made

    • 1989 – Venezuela’s economy starts to weaken – seeking a bidder

      • KLM vs. IBERIA

    • 1991 –IBERIA wins the bid

    • 1997 – Airline closed for good under acrimony.


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    CONCLUSIONS

    • Privatization works – better service & efficiency

    • TACA’s business model transcends time and regions

    • Airline industry is susceptible to sociopolitical events – especially in volatile Latin America


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